Should You Invest Lumpsum Money in Tax Saving Mutual Funds
One of the prominent reasons many people choose to invest is to save taxes. By investing in eligible instruments for tax rebates, you can save tax and appreciate your capital. Many people choose mutual funds as their preferred tax-saving investment these days. This is because, unlike other tax-saving investments such as FD, mutual funds are linked to the market, and through investing in them, you will be able to make use of the market’s growth to grow your money. But many investors are still confused about whether to invest a lump sum or through SIP in mutual funds to save taxes. Let’s explore the same and find out the most beneficial method.
Tax saving mutual funds
Tax saving investments come under section 80C of the income tax act. According to the same, you can save tax for up to Rs.1.5 lakhs for your contribution towards an investment. In other words, if the money you invest in these instruments is reduced from your taxable income, thus enabling you to save taxes.
ELSS mutual funds
The only mutual fund category under 80C is the equity-linked savings scheme or ELSS. It is an equity-focused mutual fund scheme that primarily aims at saving tax.
But unlike other 80C investments, ELSS is market-linked because of the presence of equities in its portfolio. This factor gives ELSS more growth potential than its tax-saving counterparts.
Apart from that, ELSS has a lower lock-in period of 3 years, which is the lowest among 80C instruments. Furthermore, your returns from the same are categorised under long term capital gains, and returns up to Rs.1 lakh are tax-deductible. Above Rs.1 lakh, your returns will be taxed at a flat 10%.
You can invest in ELSS through a lump sum and SIP like any other mutual fund. Let us understand the difference between the two methods first.
SIP vs lumpsum – differences
Investing in lumpsum means, you are investing a large amount of money together in an investment vehicle. There could be many reasons for doing the same, from parking your money in a safe investment place to making use of economic conditions.
On the other hand, SIP is a systematic scheme where you invest a small amount of money every month to put together a corpus. These investments are usually for a more extended period, and corpus building is mostly the aim of SIP investments. Now let’s see how these investment methods will work for ELSS.
ELSS- SIP or lumpsum?
Since ELSS is aimed at tax saving, which investment method can help you save more tax becomes the important question. Luckily, how you invest in an ELSS doesn’t matter when it comes to tax saving, but how much you invest does.
For instance, a lumpsum investment of Rs.60,000 and an SIP investment of Rs.5,000 per month will have the same effect on ELSS’s tax-saving capability. Here, the only factor is how much you invested in that financial year.
But a lumpsum investment will help if you are scrambling at the last minute to invest and save tax. For example, if you are trying to find a way to save tax close to March, you may invest a lumpsum to save maximum tax. Affordability is what gives SIP investments an edge. Since the investment is split over several months, people with diverse incomes will be able to afford the same.
From an investment point of view, lumpsum investments need to be done after careful market research. This is because if you invest in the wrong time, you might end up losing money. At the same time, since SIPs are targeted for longer time, current market situations tend to affect less.
Money saved is money earned. That is why saving tax becomes important. Use tax-saver investments like ELSS the best to save tax and maximise your income.